Lime Shines For Adelaide Brighton
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At its investor briefing, Adelaide Brighton ((ABC)) singled out the stability of its lime business and highlighted strong market dynamics and a shift to infrastructure work.
Management is constructive regarding demand from both Australian residential and infrastructure activity and notes a strong improvement in concrete and aggregates in South Australia.
Lime volumes are expected to be stable in FY18, versus prior guidance for marginally lower volumes because of imports. The company is increasingly positive regarding demand from the alumina sector, which has emanated from stronger alumina pricing. The gold sector is also considered healthy.
The main disappointment is the continued delay of the northern connector project in South Australia, Deutsche Bank believes, while expecting this should be more than offset by other projects in the company's pipeline.
Macquarie agrees the market dynamics are favourable and the company is benefiting from a tightening environment. The lime business is a key input, at 11% of revenue, where the company has a premium margin and cash flow attributes.
The company is investing in expanding downstream capacity by acquisition and also via organic growth, such as concrete in Brisbane.
Management has noted that while NSW drove price gains in the past, strength has now developed nationally and Melbourne, in particular, has experienced better price realisation of late.
Macquarie, too, observes a broadening of strength in prices, although spot price improvements appear to be running ahead of contract prices.
Import competition in lime, which represents around 25% of group operating earnings (EBIT) is likely, at least in the near term, to dampen the market, both Deutsche Bank and Morgan Stanley suggest.
Deutsche Bank retains a Hold rating on valuation while Morgan Stanley finds the valuation difficult to justify and maintains an Underweight rating.
Macquarie's Outperform rating is at the other end of the spectrum. The broker likes the investment case, underpinned by solid execution on strategy, amid evidence of improved pricing power and infrastructure support.
The broker believes Adelaide Brighton has an enviable position in the lime market in Western Australia, providing long-term stable supply to the alumina industry.
The company enjoys the benefit of a low-cost limestone source in the shell sands, extracted 10km offshore. It has a dominant market position in this area and strategically superior assets.
Management intends to pursue further anti-dumping actions to curb lime imports in the Australian market. Once lodged, such actions have a six-month process. Adelaide Brighton does not intend to drop prices to recover lost market share, given the operating leverage in the business.
In Queensland, the company has expanded its concrete capacity in an attempt to secure more volume, without disrupting prices. Others are doing the same and Macquarie believes there is an inevitable risk to the market structure, although one Adelaide Brighton should be able to navigate well.
The company is also of the view that there will be no detrimental impact from the capacity expansions by construction material competitors in Queensland, at least in the short term, noting the strongest price increases for concrete in Queensland for the last five years.
FNArena's database shows one Buy (Macquarie), three Hold and two Sell. The consensus target is $6.06, suggesting -10.6% downside to the last share price.
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